people/countries should specialize in goods and services for which they have the lowest opportunity cost

comparative advantage

optimal decisions are made at the margin

marginal analysis

additional benefit from consuming an extra unit

marginal benefit

extra cost incurred from consuming an extra unit

marginal cost

If marginal benefit is better than marginal cost

Consume the slice of pizza, do it

If marginal benefit is less than marginal cost

do not consume the slice of pizza, do not do it

If marginal benefit equals marginal cost

Consume the slice of pizza and have optimal quantity

cost that is incurred and can not be recovered

sunk cost

Positive statements

what is, true/false, and testable

Normative statements

what should be, opinions, and value judgement

the relationship between the prices of a good and the quantities of that good consumers are willing and able to buy, ceteris paribus

demand curve

slope of the demand curve

typically slopes downward

if the price of the candy bars rises, I will buy fewer candy bars because I can buy something else

substitution effect

If the price of candy bar rises, the quantity demanded falls because can't afford as much

Income effect

shift right of the demand curve

increase in demand

shift left in demand

decrease in demand

an economic force that is given relatively free rein by society to work through the market

market force

When the quantity supplied is greater than the quantity demands, price

has a tendency to fall

When the quantity demanded is greater than the quantity supplied, price

has a tendency to rise

achieving a goal as cheaply as possible

efficiency

the study of what is and how the economy works

positive economics

the study of what goals of the economy should be

normative economics

According to the text, economics is the study of how:

human beings coordinate their wants and desires.

Which 2 of the following are microeconomic problems?GDP fluctuations.Individual car loan.Cyclical unemployment.House loan installment.Business cycles.

house loan installement, individual car loan

Which 2 of the following are macroeconomic problems?The pricing policies of firms.Population growth.Marketing strategy.Work/leisure choice.Balance of payments surplus.

population growth, balance of payments surplus

You rent a car for $29.95. The first 165 miles are free, but each mile thereafter costs 16 cents. You plan to drive it 200 miles. What is the marginal cost of driving the car?

The marginal cost is $5.60 plus the cost of gas.

Any economic system:

addresses the questions what is produced, how it is produced, and for whom it is produced.

An economic model:

applies economic theory to understand real-world events.

Sunk costs:

are irrelevant to economic decisions.

You bought one share of McDonald's stock for $10, one share of Coca-Cola for $15, and one share of Pepto-Bismol for $20. Currently, each stock is priced at $15. Assuming that there are no tax issues and that you cannot predict the future price of any of the stocks, if you needed $15, which stock would you sell?Coca-ColaPepto-BismolMcDonaldsAny one of them

Any one of them

Brooke and Sandy both attend the same college and have the same expenses for tuition, books, and supplies. However, Brooke is a famous actress who could earn $2 million per year if she were not attending college whereas Sandy could earn $10,000 a year serving hamburgers if he were not attending college. It follows that the opportunity cost of attending college:

is greater for Brooke than for Sandy.

John and Jane Smith are both economists who are deciding how to split household chores of cooking and cleaning. They discover that John has a comparative advantage in cooking. Does this discovery tell them anything about comparative advantage in cleaning?

as price rises, consumers substitute other goods whose price has not risen

A change in the price of a good causes a _______ the demand curve.

movement along

A _____ of demand urve means that the quantities will be different at all prices.

shift of

Identify four shift factors of supply with the correct explanation of how each affects supply.

1. When new production technologies are introduced the cost of production falls and supply increases.2. Change in taxes paid by producers. As the amount of taxes that producers pay increases, supply decreases.3. The price of inputs changes. As the price of inputs rises, supply decreases.4. Producers expect prices of their products to change in the future. As the price that producers expect to sell their products for increases, supply decreases.

If the price of movies on DVD rises while the price of movies purchased on demand through the Internet remains the same, the law of demand predicts that consumers will:

substitute movies on the Internet for movies on DVD.

Sometimes price cuts can have an unintended result of consumers waiting for deeper discounts. What does this waiting suggest about supply and demand?

Price cuts have changed buyers' expectations, and the change in expectations has moved the demand curve left.

Which of the following would likely result in an increase in the demand for beef?

An increase in family incomes

To derive a market demand curve from individual demand curves, it would be necessary to:

sum the curves horizontally, adding quantities demanded at each price.

Say that equilibrium price rose and quantity remained constant. What would you say was the most likely cause?

There was an increase in demand and a decrease in supply.

Suppose that salsa manufacturers sell 2 million bottles at $3.50 in one year, and 3 million bottles at $3 in the next year. Based on this information we can conclude that the:

supply of salsa has increased.

If X is a normal good, a rise in money income will shift the:

demand curve for X to the right.

Price elasticity of demand is the:

percentage change in quantity of a good demanded divided by the percentage change in the price of that good.

A price elasticity of demand for a good or service of 1.8 tells us that:

quantity demanded falls by 1.8 percent when price rises by 1 percent.

Determine the price elasticity of demand if, in response to an increase in price of 10 percent, quantity demanded decreases by 20 percent.Is demand elastic or inelastic:

2 and elastic

Along a straight-line demand curve, elasticity:

rises as price rises.

Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded:

decreased by 7 percent.

We would expect the cross elasticity of demand between dress shirts and ties to be:

negative, indicating complementary goods.

The elasticity of demand for a product is likely to be greater:

the greater the amount of time over which buyers adjust to a price change.

If the federal government wanted to tax a good and suppliers were strong lobbyists, but consumers were not, would government prefer supply or demand to be more inelastic? Why?

Government would prefer demand to be more inelastic, because then consumers would bear the largest portion of the tax. If suppliers had to bear the greatest burden, they would have an incentive to lobby against the tax.

What types of goods would you recommend that the government tax if it wants the tax to result in no welfare loss?

Inelastic goods with a price elasticity of demand and supply as close to zero as possible.

A few examples of goods that would lead to little or no welfare loss when a tax is placed on them include:

medication and salt

Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. Who would bear the larger share of the burden of a tax placed on cigarettes?

The consumer: The more inelastic the demand curve, the larger the percentage of the burden is borne by the consumer.

Should tenants who rent apartments worry that increases in property taxes will increase their rent? Does your answer change when considering the long run?

No. Tenants shouldn’t worry too much. In the short run, the supply of apartments is highly inelastic so the owner will bear the majority of the tax burden; it will not be passed on to tenants. In the long run, supply is more elastic so the renter will pay some of the tax. So, in the long run, tenants should worry more.

Mary buys cell-phone services from a company that charges $30 per month. For that $30 she is allowed 600 minutes of free calls and then pays 25 cents per minute for any calls above 600 minutes. Mary has used 600 minutes this month so far. What is her marginal cost per minute of making additional calls?

25 cents

Chuck offers $70,000 for a house. The seller turns down the offer but says she will sell the house for $72,000. However, Chuck refuses to pay the higher price. If Chuck is following the economic decision rule, the marginal benefit of the house to:A. Chuck must be less than $72,000B. Chuck must be greater than $72,000C. the seller must be less than $72,000D. the seller must be less than $70,000.

A. Chuck must be less than 72,00

"Government should not use price controls" is an example of:

normative economics

Scarcity exists because:

new wants continue to develop and willingness to meet them is limited.

Which of the following is least likely to be studied in macroeconomics?

advertising

Countries gain from trade by producing:

the goods they can produce at the lowest opportunity cost.

If the price of chicken rises and the price of beef does not rise, consumers will respond by:

substituting beef for chicken.

The distinction between demand and the quantity demanded is best made by saying that:

demand is represented graphically by a curve and quantity demanded as a point on that curve.

Suppose farmers can use their land to grow either wheat or corn. The law of supply predicts that an increase in the market price of wheat will cause:

farmers to substitute wheat for the production of corn.

The supply of leather jackets would be expected to increase as a result of:

a decrease in the cost of producing leather jackets.

The more the current price exceeds the equilibrium price, the

greater the resulting surplus will be.

If supply and demand both shift to the right, equilibrium quantity:

rises, but the equilibrium price may rise, fall, or stay the same.

Season tickets to the Miami Heat games are sold out at $30 a game and some people who wanted to get tickets couldn't buy them. As the season progresses, it is clear that the Heat will make it to the playoffs. What is the effect on resale price of tickets to Miami Heat games, assuming resale is legal?

Resale price will rise and quantity supplied will rise.

Stricter environmental regulations and increased demand for energy have caused an increase in the demand for relatively clean natural gas. In the last several years, improved extraction technologies and new discoveries have increased the availability of natural gas. What has been the net effect on price and quantity for natural gas?

Quantity sold rose while the effect on price is ambiguous.

A number of states have a minimum wage that is higher than the federal minimum. In those states that impose a minimum wage above $7.25 an hour, it is more likely that the minimum wage acts as a binding:

price floor, causing excess supply in the market.

It has been estimated that the price elasticity of demand for attending baseball games is 0.23. Other things held constant, a 10 percent increase in attendance can be explained by a:

43.48 percent fall in the price of a ticket.

Demand is said to be elastic when the:

percentage change in quantity demanded is greater than the percentage change in price.

If the price of a good goes up by 5 percent% and, in response, the quantity demanded falls by 15 percent, the price elasticity of demand will be:

3

If the percentage increase in the quantity supplied is smaller than the percentage increase in the price, the supply:

is inelastic

The president of a college has been told that when they raised their tuition by 15 percent the previous year, total revenue from tuition remained unchanged. Assuming the change in revenue is due to the change in tuition only, the president could conclude that demand for that college, over that tuition range, must be:

equal to 1

It is estimated that a 5 percent decline in income will reduce health care purchases by 2.5 percent and reduce dental service purchases by 8 percent. From this information, one can conclude that:

health care is a necessity and dental services are a luxury.

It is estimated that a 3 percent drop in the price of Asian and European autos will decrease the demand for American cars by .84 percent. From this information one can conclude that:

European and Asian cars are substitutes for American cars.

If Portuguese wines are an inferior good, higher incomes will cause:

a decrease in the demand for Portuguese wines.

Which of the following most likely correctly orders goods from most to least demand elastic?

cars, motor transportation, transportation

If demand is highly inelastic and supply shifts to the left:

price will rise significantly; quantity hardly changes at all.

Total consumer surplus is measured as the area:

between the vertical axis, the demand curve, and a horizontal line through the market price.

There would be no deadweight loss if:Term

demand was perfectly inelastic

A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect:

the small groups interest

the relationship between the prices of a good and the quantities of that good and producers are willing and able to sell, ceterius paribus